Real Effects of Search Frictions in Consumer Credit Markets

From Bronson Argyle, Taylor Nadauld and Christopher Palmer

We show that search frictions in credit markets affect accepted interest rates and loan sizes and distort consumption. Using data on car loan applications and originations not intermediated by car dealers, we isolate quasi-exogenous variation in both the costs and benefits to searching for credit. After identifying lender-specific policies that price risk discontinuously, we study the differential response to offered interest rates by borrowers in areas with high and low search costs. High-search-cost borrowers are 10% more likely to accept loan offers with higher markups, consequently originating smaller loans and purchasing older and less expensive cars than lower-search-cost borrowers.

Learn More about Lending Markets

Current Lending Markets projects from the Consumer Finance Initiative cover topics including mortgage refinancing, lending standards and shadow debt and bankruptcy. Find more Lending Markets research here.